The study is about how greater news dissemination increases the visibility of the firm issuing the news and lowers the cost of acquiring information for investors, AND that this has a direct effect on tightening the bid–ask spread, increasing trading volumes and reducing volatility.

The first thing to understand is that ‘news dissemination’ (as defined in the study) is based on the effect of repeating and transmitting the same piece of information through the business press. For example, when the WSJ writes an article about a firm’s earnings, part of the information distributed by that article is strictly the disseminated news (the other part is new information). The degree to which this is measured in the study is based on the number of articles created by the business press from a company issuing a press release.

Therefore, if a press release is issued and has 100 articles written based on it, it is deemed to have a higher degree of dissemination than one that results in only 10 articles. Following this example, the news with more articles (aka dissemination) results in the issuer experiencing a tighter bid-ask spread, increased trading volumes and reduced volatility. it is important to note that this has no impact on the movement of the stock, these effects occur when the stock moves up and when it moves down.

This is not a study or an endorsement of press newswires and their capital market benefits. In fact, according to the research, if a press release is issued and does not receive any press coverage, it is not considered ‘disseminated’ (regardless of how widely it was distributed through a newswire) and therefore was not included in the study. As such, none of the capital market benefits listed in the report would apply.

This research supports much of the real world experience in issuing press releases that do not receive press coverage – they merely disappear into the information ether. Simply being included in the newswire feed does not provide the capital market benefits outlined in the study – what matters is how much your news is written about, shared, discussed and syndicated.

In addition, the study makes no correlation between managers buying increased distribution (like a global circuit from a press newswire) and these benefits. In other words, you cannot purchase increased ‘dissemination’ from a press newswire.

Nor does the research provide any basis for suggesting that web disclosure won’t work. In fact (as you’ll see below), the capital market benefits are very much related to the dissemination of news through the web, if you extrapolate the results to today’s world.

All research was conducted using a Factiva database of articles between 2000 and 2006, and measures only the number of articles contained in that database. It does not include mentions on web sites, blogs, or broadcast TV.

On this note, the study explicitly states that the research does not include the period after 2006, and as such, does not take into account the impact of RSS or the web as it relates to the SEC updated guidance on Reg.FD. However, the paper does make specific reference to RSS.

“RSS feeds have the potential to affect the distribution of news. These information streams can deliver information in real-time from firms to investors. However, RSS does not affect the distribution of information in the context of this study since RSS did not become widely available until mid-2007.”

So, with these trends in mind, if we extrapolate this study to the world today, the definition of ‘news dissemination’ is really about the level of information generated by a press release on the web, in other words – the level of discussion, sharing and syndication of the news through social web such as blogs, RSS, social networks, etc. Therefore, the capital market benefits outlined in the study are achieved through the increased social footprint of specific news items.

On this note, a study from Sept 2007 called the The News You Choose – How User-Driven Content Differs from Mainstream Media details how the dissemination of news has changed with the massive usage of sites such as Reddit, Digg and Delicious. What is of most interest in the chart to the right is the ratio of blogs and non-news sites to the traditional sources of news. It would be interesting to see what this chart would look like today (especially with the impact of Twitter), as I’m confident the trend has significantly increased.

If this is the case, and it’s all about the web, then the argument supporting web disclosure and the distribution of corporate information through blogs, RSS, social networks, micro-sharing, etc. is even stronger. Because it’s not about blasting information into the ether, but rather about the information released by companies that is of interest to the market and thus written about, repeated, discussed, shared, etc.

This is what web disclosure is all about. It’s not about just posting a press release on a web site which would make it hard for people to find. It’s about leveraging the social web and putting your information into the web so that it can be written about, repeated, discussed and shared among the media, investors, analysts and the company itself.

Having said all the above, in order to utilize web disclosure today takes time and investment. What the market needs is a way to make it easy for companies to utilize web disclosure and methods to aggregate the news so that it’s easy for investors to find and subscribe.

Comments

Obi Onyeaso

Thanks for the background you provide to the research Darrell. I’ve downloaded it already and devouring same. Will come in quite handy. Considering carrying out same survey -on a far smaller scale of course – for companies on the Nigerian Stock Exchange. Very useful findings. Thanks for this.